Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

May 7, 2013

Self-Storage Business.... and Perspectives on Creating a Financing Strategy

I had the privilege of attending the California Self Storage Association’s owners’ conference in Napa last week.  It was a fun time with meaty sessions, warm weather and good food and fine wine.  The CSSA is a great association that gives its members the type of value that only comes when there are more “givers” than “takers” in an association.  I am always pleasantly surprised how much Self Storage owners share with each other; a bit different from many other trade groups.

As a mortgage banker among the self-storage owners, I found myself addressing two common questions…

What is the lending community’s image of self-storage? 

My answer: Excellent among the lenders who have learned this sector, with more lenders getting on board all the time.

Where are rates today? 

My answer: The best they have ever been in my entire career.  We have recently closed several loans well below 4% fixed for 10-years on larger, well-located self-storage properties.

Greetings from California!

What follows is the start of a chapter I wrote for a book published by the California Self Storage Association, “Greetings from CA: Best Practices from the CSSA”   It was written a year ago, but it holds up pretty well.  If your read the entire chapter, just keep in mind that interest rates and cap rates are down 75 basis points since this was published!

The importance of asking Why? before What? or How Much? *

So you need a loan?  You and your partners are buying a self-storage facility or you have a loan coming up for refinance.  “This should not be too hard.” you say to yourself.  Lenders are coming back into commercial real estate and are looking favorably on self-storage as a product type.  As we come out of the recent downturn in 2012 self-storage may not be on top of the heap, but it is near the top.  Self-storage has a relatively low rate of foreclosures and a relatively high recovery ratio when loans do go bad.  In fact, self-storage weathered the downturn extremely well, except for those doomed facilities built at the top of the bubble near the edge of the exurbs still waiting for the rooftops to appear.  Lenders recognize that self-storage does not have the great swings in occupancy and rents experienced by other property types.  Lenders can trust self-storage income streams;  rents are real and a few years of strong collection reports is better than relying on an office or retail tenant’s credit rating that could be gone tomorrow.

With this favorable financing environment it’s not hard to get a loan for a stabilized self-storage project, but it is hard to be sure it is the right loan for your situation.  Efforts to finance without a financing strategy often fall into two approaches.

Scenario One: Ready! Fire! Aim!

You pick up the phone and call your mortgage banker.  He explains there are lots of options available and presses you for some guidance.  You say. “Show me what is out there.  Get me a variety of quotes so I can see what’s available.”  Your mortgage banker pulls favors and runs a wide variety of lenders through their paces and comes back with a mixture of quotes that looks to you like apples & oranges; different loan amounts, rates, loan terms, recourse provisions, prepayment penalties, impounds and other lender controls, and different amortization periods, all from lenders with various reputations as to surety of execution and loan servicing behavior. You want to keep things simple so you focus on only one of the many financing variables (usually the interest rate or total loan proceeds) and compare the options that way.   You pick a lender and financing structure that you worry you later may regret, but can’t quite put your finger on what is bothering you.

Scenario Two: Ladies and Gentlemen, Start your Engines!

This scenario is even worse than a single mortgage banker casting around without guidance, you and your partners start the financing search by each partner taking the initiative, dialing for dollars, calling multiple mortgage brokers and banks.  The competing mortgage brokers get into a footrace to reach lenders before the other guy, so they can protect their fee.  Their packages are sketchy and inaccurate because they prepared them in haste.  Their presentation of your story is fragmented, poorly rendered and the unprofessionalism reflects on you and your project.  The various banks contacted by your partners are competitive and jealous of each other and feel disrespected, but still begrudgingly prepare preliminary term sheets.  The quotes come in, with each source selling their solution and disparaging all other approaches.  Your partners each champion their financing sources and take it personally that you will not direct the financing to their favorite bank.  The quotes are hard to compare because they were based on different NOI projections and different financing requests.  You feel you are only getting half the story and you don’t like the pressure tactics from the lenders and brokers competing to secure the business.   Given this chaos how do you have confidence in your choice of lender and loan structure? "

* From the book: Greetings from California: Best Practices from the California Self Storage Association features a unique collection of self-storage insights and knowledge from this highly respected group of professionals.

Voted the 2011 Best State Association, the California Self Storage Association counts among its members some of the most experienced operators, property managers and marketing experts in the self-storage industry.